Dr Martin Stopford | President Clarkson Research · 2020. 5. 14. · THREE MARITIME SCENARIOS...

Coronavirus, Climate Change & Smart Shipping THREE MARITIME SCENARIOS

2020 – 2050

20th April 2020

A White Paper published by Seatrade Maritime, part of Informa Markets copyright Martin Stopford 2020

Dr Martin Stopford |

President Clarkson

Research

Stopford -Three Maritime Scenarios 2020-2050

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Contents: Three Maritime Scenarios 2020-2050

Introduction ..................................................................................................... 2

Executive Summary ......................................................................................... 3

1. The starting point for the scenarios ......................................................... 5

2. Analysis of the Severity of Shipping Cycles 1885-2020 ............................ 5

Ship prices as a measure of market cycles .................................................. 5

Length and depth of market troughs 1885-2020 ......................................... 5

Severity of market troughs ........................................................................... 6

Conclusions from the trough severity analysis 1885-2020 ......................... 7

a closer look at freight market troughs 1970-2020 ..................................... 7

3. Influences on the forthcoming recession................................................. 8

4. Pandemic Scenarios and the technical revolution .................................. 9

5. Three Seaborne Trade Scenarios .............................................................. 9

Sea Trade Scenario 1 (trend growth): ........................................................ 10

Sea Trade Scenario 2 (soft growth): ........................................................... 10

Sea Trade Scenario 3 (slump growth):........................................................ 11

6. Three Shipbuilding Demand Scenarios .................................................. 11

Shipbuilding Scenario 1 (trade scenario 1, Design speed, fleet

replacement): ............................................................................................... 12

Shipbuilding Scenario 2 (Trade Scenario 2, slow speed, fleet

replacement): ............................................................................................... 12

Scenario 3 (Trade Scenario 3, Eco-speed, fleet replacement): .................. 13

7. Three Waves of Technical Development ................................................ 13

Technology Wave 1: .................................................................................... 14

Technology Wave 2: .................................................................................... 15

Technology Wave 3: .................................................................................... 15

8. Carbon footprint of the three scenarios ................................................. 16

Appendix 1 Summary of paper presented in Shanghai 3 Dec 2019 ............ 17

Appendix 2 Summary smart shipping technology slides 2020-2050 ........ 18


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Coronavirus, Climate Change & Smart Shipping

THREE MARITIME SCENARIOS 2020-2050 Martin Stopford, President Clarkson Research, 20th April 2020

Introduction

This paper started life as a presentation to Marintec China Senior Maritime Forum on

3rd December 2019. Following that event, I was invited by China’s Diesel Engine

Magazine to do an interview. They sent me questions about new technology and the

prospects for the shipbuilding industry and just as I finished drafting answers, the

coronavirus (COVID-19) pandemic appeared out of nowhere, demanding attention.

Since by this time I was locked down at my farm, it was an ideal opportunity to develop

the model I had been using to analyse long-term scenarios for smart shipping and

climate change to incorporate the pandemic.

Shipping is a long-term business and this paper draws out three scenarios to 2050

developed with the model. Obviously, models have no special forecasting magic, but

they ensure a degree of arithmetic consistency (if the equations are correct!) and

sometimes highlight a blindingly obvious trend in danger of being overlooked.

In these scenarios coronavirus, climate change and smart shipping are all seen as part

of the seascape which lies ahead in the voyage to 2050. In terms of technical and

economic change, the three decades will be every bit as challenging for investors as were

the decades from 1860 to 1890 when the maritime industry made its last major technical

transition, in those days from sail to steam. Many owners continued with sailing ships,

but in times like this participation in change is not optional. Like the virus, it’s all a

matter of time.

I would like to thank Diesel Engine Magazine for inviting me to do the interview and

Seatrade Maritime for publishing the paper. Of course, these are just my personal views,

not necessarily those of Clarksons. Bon voyage.

Martin Stopford

20 April 2020


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Executive Summary

1. In January 2020 the shipping industry entered a new decade with weak market fundamentals and the prospect of a difficult year, with a few

bright spots. But the coronavirus pandemic (CVP) was already laying

the foundations for a darker scenario.

2. The answer to the question “how deep and how long?” is a trade-off. The widely adopted strategy of “lockdown” backed by fiscal measures,

is launching the world economy on a precarious tightrope walk which

has already lead to less trade. Meanwhile shipbuilders have reduced

capacity, short orderbooks, and ordering is about 75% down.

3. The scenarios in this paper illustrate how this risky strategy might unfold for the maritime business. Scenario 1 goes to plan, and sea trade

picks up 2023, whilst the other scenarios discuss less favourable

outcomes, in which recession stretches into the middle of the decade.

4. In reviewing the shipping industry’s response to the pandemic, we must remember that in the years ahead the maritime industry must

also deal with climate change and the I4 digital revolution.

5. There has been much discussion of these challenges, but so far practical progress has been patchy and disjointed. By shaking up the

status quo, the pandemic might be a catalyst for the radical measures

needed.

6. The three scenarios also remind us that in the next 20 years the maritime industry must rebuild its cargo fleet. If this is done with the

radical technologies now available, it will lead to the biggest change

in ship design since steam replaced sail in the 19th century.

7. .Shipbuilders, their suppliers and their customers, will manage this transition, involving the integration of the key functional systems on

board ship to incorporate various degrees of automation; ideally

under industry protocols for managing “messaging” arbitration on big

ships (i.e. CANbus type protocols which need to be developed).

8. The three sets of scenarios cover sea trade 2020-2050; shipbuilding requirements 2020-2050; and ship technology 2020 to 2050. Appendix

1 is a summary of the Shanghai talk and Appendix 2 contains key smart

shipping slides from the presentation

9. The three Sea Trade Scenarios to 2050 (Figure 2) start with the coronavirus pandemic (CVP), and each has a different outcome.

10. In Sea Trade Scenario 1 the global pandemic follows China’s pattern. After difficult years in 2020 and 2021, maritime trade returns to

normal, growing at 3.2% per annum to 2050.

11. At the other extreme Scenario 3 envisages persistent problems, a deep economic downturn which, combined with climate change measures;

leads to a 15% fall in seaborne trade by 2024, followed by 0.7% pa cargo


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growth 2025-2050. This scenario resembles the impact of the oil crises

which triggered the 1970s and 1980s shipping recessions.

12. All three Shipbuilding Scenarios confront shipyards with a sharp downturn in new ship requirements over the next two or three years.

Scenario 3 shows the most severe trough. But new orders placed will

not follow “requirements”. It raises policy issues and counter cyclical

ordering for speculative, social and strategic reasons.

13. In the long term the Shipbuilding Scenarios (Figure 3) point to substantial shipbuilding demand due to trade growth; slower

operating speeds; and the re-design and re-engineering of cargo ship

systems in response to climate change and smart shipping (I4).

14. Speed optimisation is a major design issue because, with today’s technology, slow speed is the easiest way to reduce emissions (but at

the cost of more ships being needed). The integration of functional

ship-board systems to increase automation and quality assurance

(QA) will be equally important.

15. The Technology Scenario (Figure 4) suggests three "waves of development" can be used to build a fleet of robust and commercially

viable ships, incorporating new and untried mechanical, electrical and

digital equipment.

16. A wave of enhanced diesel ships might be followed (or accompanied) by a wave of gas and hybrid electric powered vessels; then a wave of

zero carbon ships e.g. using fuel cells. Each “wave” would allow new

technology to be developed and commissioned in real-world

operating conditions, on a gradual but cumulative basis.

17. This approach is similar to the implementation of steam technology during the transition from sail to steam in the 19th century.

18. Finally, the emissions analysis (Figure 5) shows that in 2050 Emissions Scenario 1 produces 771 Mt of carbon, almost double the IMO target;

Emissions Scenario 2 produces 321 Mt of carbon pa and Emissions

Scenario 3 produces 184 Mt of carbon, both well below the IMO target

of half the 2008 carbon emissions.

19. In conclusion the pandemic will lead to some sort of recession, which could be mild or severe. In this respect the future remains open. But

this should not divert attention from the task of progressing the

transition to smart ship design and climate friendly sea transport. 20. We know we cannot predict the future. But we can try to prepare for

changes that are clearly “on the cards”. Not preparing can be riskier

and more expensive than the “safe” option of doing nothing.


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1. The starting point for the scenarios

Shipping entered 2020 with a mixed outlook. The world fleet grew by 4% in 2019, but analysts

expected the growth rate to halve to 2% in 2020, due to lower shipyard deliveries (about 70

million dwt) and higher scrapping. But this fall in shipyard output looked likely to be matched

by deteriorating demand.

World industry fell to 0.1% growth in the year to October 2019, well below the trend rate of

around 3.6% pa so it was doubtful if demand would be strong enough to match the growth of

supply. Meanwhile shipping was preoccupied with emission regulations, climate change and

the ongoing digital revolution. But by the end of March the coronavirus pandemic had made a

deep recession unavoidable, raising the questions “how long and how deep?”

2. Analysis of the Severity of Shipping Cycles 1885-2020

As we move through the coronavirus pandemic, for the shipping industry, the outcome will

probably be some sort of recession, due to lower global industrial growth at a time when the

business cycle was already moving towards a trough. The question is what sort of recession and

how severe could it be? Market models can provide some sort of guidance, but it is also useful

to start with look at the severity of previous shipping recessions to see if there is any pattern

that help think through the implications of the Pandemic.

SHIP PRICES AS A MEASURE OF MARKET CYCLES

A good indicator of the severity of a recession is the fall in ship values. They dominate the

balance sheet of ship owners and provide lenders with security in the event of a default. From

this perspective a recession is severe if it results in a deep slump in ship prices over several years

and mild if prices fall moderately for a short period, maybe a year or 18 months.

LENGTH AND DEPTH OF MARKET TROUGHS 1885-2020

The characteristics of the six most serious troughs of the new price of a handy dry cargo ship

between 1885 and 2020 is shown in Table 1. Over this period the ship size increased from 3,500

deadweight to 38,000 deadweight, so the analysis of cycles in new ship prices is carried out in

$/dwt (converted from UK pounds to US dollars in the early periods). In each year from 1888 to

2017, the percentage difference between the actual $/dwt and the seven-year moving average of

the $/dwt was calculated, price computed. If the percentage was negative the market was

regarded as being in a trough in that year.

Table 1: Analysis of shipbuilding prices in $/dwt for standard "handy" dry cargo ships 1885-2020

1 2 3 4 5 6 7 8 9

Trough

Rank (1) PERIOD Start End Years Peak (2) Lowest Severity Description

1 1930-1936 1930 1936 7 35.6 2.1 -316% Shipbuilding boom followed by 1930s trade slump

2 1920-1926 1920 1926 7 87.8 35.2 -107% Post WW1 shipbuilding boom, 1920-21 trade slump

3 1983-1987 1983 1987 5 560.4 297.5 -71% 2nd Oil price shock & early 1980s trade slump

4 1997-2004 1997 2004 8 512.1 387.7 -62% Asia Crisis recession followed by dot.com recession

5 1976-1979 1976 1979 4 450 332.7 -53% Shipbuilding boom, 1st oil price shock & trade slump

6 2009-2017 2009 2017 9 958 550 -49% Shipbuilding boom, credit crisis & financial easing

7 11 Others Na Na 3.0 Na Na -25% Average of 13 other cyclesSource: Various, collected by Martin StopfordNote 1: Excludes 1913-15 cycle

Note 2: Peak price in year before the trough start

Trough duration Cycle length Ship Price $/dwt


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SEVERITY OF MARKET TROUGHS

From this year by year trough data, the severity of each trough (Table 1, col 8) was calculated by

summing the percentages in those consecutive years in which the $/dwt price was below the

seven-year trend price. The longer the trough lasted and the deeper it fell below the trend, the

greater is the “severity” percentage shown in Table 1 column 8, which ranks the 17 troughs by

"severity".

The most severe recession started in 1930 and ended in 1936. There was a shipbuilding boom

1926-1929 during which UK output increased 238%, then trade collapsed in 1931 and freight rates

followed1. With no orders for new ships, most shipyards closed their gates2 and the price of a

new tramp fell from $37/dwt in 1929 to $2/dwt in 1933. Second hand ships were selling for even

lower prices, so this was an extreme recession, with little fiscal intervention. which hopefully

with today's fiscal intervention will not be repeated3. The severity index was -316%, an extreme

score .

In second most severe was the 1920-1926 slump. This followed the 1917-1920 shipbuilding boom,

set off by the very heavy losses of merchant ships during the N Atlantic war in 1917. Between

1916 and 1920 UK launches increased by 300%. But a deep economic depression in 1920-21

triggered this recession which lasted 6 years with a severity index of -107%.

In third place was the 1980s recession, which lasted five years from 1983 to 1987, with an index

value of -71%. This time shipyard capacity was quite low and problem was mainly on the demand

side. The 2nd Oil Crisis in 1979, started a recession which reduced sea trade by 17% between 1979

and 1983. Counter cyclical ordering prolonged the recession.

In fourth place was the 1997 to 2004 recession. Supply was not a major problem in this trough,

and shipyards were very short of orders. The problem was that the Asia Crisis in 1997 was

followed three years later by the Dot Com crisis. The resulting recession lasted eight (tankers

had a short boom in 2000)., but was not very deep and the severity score was only -62%.

Sentiment was very weak in 1999 and 2001.

In fifth place came the 1976-79 recession. This followed the great shipbuilding boom in which

deliveries increased 238% between 1969 and 1973. The collapse was triggered by the economic

recession following the 1st Oil Crisis in 1973, and the trough, which lasted four years from 1976

to 1979, had a score of -53%. 1

Finally, the 2009-2017 trough came sixth, This was another combination of a shipbuilding boom

(shipyard output increased 250% in dwt between 2004 and 2011) followed by a demand collapse

due to the 2008 Credit Crisis. But the economic crisis had limited impact due to financial easing

measures and China’s infrastructure initiative in 2010. Although this trough lasted 9 years, the

severity score was only -49%4.

1 Between 1931 and 1934 sea trade fell by 25% from 473Mt to 354Mt 2 UK shipbuilding launches fell by 91% between 1929 and 1933 (1.5 M GRT to .13 M GT). 3 In the UK this recession was marked by the Jarrow March of shipyard workers from Jarrow on the River Tyne to London 4 Technically the 2009-2017 recession should be regarded as two separate minor recessions, separated by a “severity” rating in 2014 of +7%. But in view of its topicality the two recessions were run together in Table 1.


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The other 11 cycles were relatively mild with a severity average of -25%.

CONCLUSIONS FROM THE TROUGH SEVERITY ANALYSIS

The message from this analysis of the most severe cycles is clear. Four of the six most serious

shipping recessions/depressions of the last 135 years consisted of a shipbuilding boom followed

by a severe trade recession (category 1). In the other two cases there was no shipbuilding boom,

but the demand side suffered from recurrent economic problems, but the relatively mild

recession dragged on (category 2). The way both categories of recession played out also

depended on economic management of the demand side. The worst outcome was in the 1930s,

when there was no fiscal intervention, whereas in the 2009-2017 recession the apparently toxic

combination of the 2004-2011 shipbuilding "super boom", and the 2008 Credit Crisis, was

moderated by government policies of financial easing.

Looking ahead, the positive message for both shipbuilders and shipping investors is that the

shipbuilding industry enters this recession at the end of a long period of contraction, so we may

be looking at a category 2 recession. The climate crisis could also be a positive supply side

influence, because slow steaming, an attractive way of reducing carbon emissions, also reduces

the delivery performance of the fleet, soaking up what would otherwise be surplus shipping

capacity. So, the real focus in the scenarios going forward is on the economic management of

the pandemic and continued focus on climate change. I4 and new propulsion technology will

also create new opportunities for adventurous investors.

A CLOSER LOOK AT FREIGHT MARKET TROUGHS 1970-2020

Table 1 provides a statistical account of the severity of troughs, but little insight into how they

developed financially. Figure 1 aims to fill this gap by comparing dry cargo costs and revenues

over the last 50 years. It shows an area chart of estimated monthly costs for a Panamax bulk

carrier between 1970 and February 202 (OPEX, interest; bankers spread and depreciation)5. The

chart compares these costs with market earnings, which is shown by the solid line. When the

5 This data series is pieced together from various sources and is not precisely accurate, but is probably "good enough for jazz". Ship costs are not a precise science and not well documented.

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Notes on the chart1. The area chart shows the daily cost of a "new" Panamax bulk carrier based on depreciation; interest plus spread; and OPEX. Cash costs are at the bottom and depreciation at the top. 2. The line shows daily earnings of a Panamax bulker. In the earlier years it is 1 year time charter rate and in later years spot time charter equivalent.3. Comparison of earnings with costs indicates the severity of the troughs, most of which follow some sort of crisis in the world economy.

2nd oil crisis1979

Kuwait invasion 1990

Credit Crisis 2008

Dot.Com Crisis 2000

Asia Crisis 1997

China Infra-

structure Boom2010

1st Oil Crisis1973

Figure 1 Panamax bulk carrier shipping market cycles, comparing costs and revenues 1970-2020

Source: compiled by Martin Stopford from various sources

2nd Oil CrisisTrough

Asia Crisis etc Trough1

st Oil CrisisTrough

Credit Crisis Trough

1971-2Trough

Coronavirus2020


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black line is above costs investors are making money and when it below, they are not covering

costs, since cash coming is not enough to cover debt or depreciation. I have followed all these

cycles over the years, and I would say Figure 1 gives reasonable account of what happened.

The most serious trough we identified in Table 1 was in the 1980s between 1983 and 1987. Figure

1 shows that during this long period earnings never covered interest. This long, deep recession

unfolded year by year. Nobody expected the world economy and the oil trade to collapse in the

way they did, due to a behavioral change by power stations. A lesson to remember.

The next most serious trough was the recession between 1997 and 2004, triggered first by the

Asia crisis, followed shortly afterwards by the Dot.com crisis. Figure 1 shows this had a different

character from the 1980s – it was long but not so deep. Over the eight years, earnings were

occasionally enough to cover costs, but mostly well below them. It was a discouraging time for

investors, but not as brutal as the 1980s.

The third serious modern recession in Table 1 ran from 1976 to 1979. It lasted only four years,

but it was deep! Earnings spent most of that time falling on in line with operating expenses. But

many owners still had timecharter income, so financial pressure was not as severe as the 1980s.

Finally the 2009-2017 recession was another that dragged on discouragingly, but interest rates

were low and there was some cash flow

The conclusion is that although market troughs are variable and sometimes unexpected, they

do conform to market fundamentals. Shipbuilding super-booms make them worse and good

economic management helps. Today with limited shipbuilding capacity, the nature of the

economic crisis and the way it is managed will make a big difference. The scenarios in this paper

are intended as the starting point for thinking through what the supply-demand permutation

might be this time. Which, after all, is what shipping investors are paid to do (when they do

occasionally get paid!).

3. Influences on the forthcoming recession

For shipbuilders the impact of the pandemic will not just depend on the virus. The impact of

the various revolutionary technical changes facing the industry will also be important. There

are five factors, three economic and two technical: -

1. The impact and timing of the corona virus pandemic on the ship demand cycle.

2. The ongoing impact of climate change regulations on ship demand.

3. Shipbuilding new orders, prices and capacity management.

4. The timescale for introducing zero carbon ship propulsion systems.

5. The timescale for digital technology in ships, companies & logistics.

The first three variables are concerned with the economic and regulatory framework within

which the marine industries will operate in the coming decade and the last two with the new

technology that is available or must be developed to deal with the challenges raised in items 4

& 5.

Economic

Technology


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This technical revolution is particularly

challenging because for the last 50 years,

shipbuilding technology has not changed

very much, and designers could rely on “last

done” 6. But in the coming decade shipyards

and their suppliers must offer designs

involving new digital and low carbon

technology. This will not be easy, because

shipping is a technically conservative

industry, and for good reason. No

shipowner wants the risk of un-tried

technology on ships operating in remote

parts of the world. Before the pandemic shipbuilders were facing change on a scale not seen

since the fossil fuel revolution in sea transport 200 years ago. In a long cycle business like marine

shipbuilding and engineering it is important to continue to work towards longer term goals.

4. Pandemic Scenarios and the technical revolution

As a framework for answering the questions raised by The Diesel Magazine, I constructed a

series of scenarios which capture the possible impact of the five issues outlined above7.

• The first section below describes three seaborne trade scenarios which treat the

pandemic as the dominant short-term cyclical issue; and climate change as the main

long-term issue. The three scenarios explore how these very different aspects of

maritime transport demand may develop.

• The second section uses the sea trade scenarios to estimate the requirement for new

ships. It calculates "expansion demand" to grow the cargo fleet and "replacement

demand" to replace ships scrapped due to age or obsolescence.

• The third section develops technical scenarios for building a new fleet of ships

incorporating technology capable of meeting IMO 2050 carbon emissions targets,

subject to the technical constraints faced by shipyards and equipment

manufacturers.

5. Three Seaborne Trade Scenarios

Figure 1 shows the three scenarios of how trade might develop in the short run due to

coronavirus (Scenario 1-Mild; Scenario 2-Extended; and Scenario 3-Severe) and in the long term

due to climate change regulations between 2020 and 2050 and Smart Shipping(Scenario 1-Trend;

Scenario 2-Soft; Scenario3-Slump). The coronavirus Scenario 1 is combined with Climate Change

Scenario 1, and so on for the other scenarios. Scenario 1 combines the upside cases and Scenario

3 the downside cases (what happens in the real world is a different matter!).

6 Each new generation of merchant ships was slightly bigger than its predecessor, and there were improvements to on-board equipment, but the basic technology of the ships delivered today is much the same as 40 years ago when I was in shipbuilding. Shipbuilders and shipping companies needed few research and development resources 7 . I used my modelling system to make these scenarios internally consistent and to highlight specific challenges which the scenarios suggest.

In recent decades shipbuilders and

shipping companies needed few research,

development and design resources. They

could rely on “last done” when tendering.

But that is no longer the case. In the

coming decade shipyards and their

suppliers must be able to offer designs

involving new technology,


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The coronavirus scenarios involve three different visions of how the pandemic might develop.

Scenario 1 describes a "mild case" in which the progress of the virus across the world follows a

similar pattern to China. Economies take hit a from the fiscal program in 2020-21, but sea trade

grows by 2% in 2022. In Scenario 2 the recovery drags through into 2022. The fiscal consequences

and logistics problems of getting business back to normal become much more severe. Sea trade

falls by 1% a year in 2021 and 2022, with zero growth in 2023. Scenario 3 envisages a longer and

deeper recession in which sporadic repeated lockdowns cause lingering economic problems and

fiscal budgets are under extreme pressure. The trade recession lasts three years (this case was

based on the early 1980s shipping recession). To summarise: –

SEA TRADE SCENARIO 1 (TREND GROWTH):

This scenario assumes a relatively mild CVP downturn in 2020 & 2021. New cases generally peak

four or five weeks after lockdown, followed by a phased return to normal business eight to ten

weeks later. China is back to work in summer of 2020. Europe and USA see infections peak in

late-April and social measures are progressively relaxed in May and June. The fiscal measures

(15-20% of GDP) get businesses back to work reasonably within budget and by year end

economies are working again. Testing, treatments and inoculation prevent further major

recurrences and credit issues are successfully managed. But the problems of global supply

chains for materials and products probably lead to lower trade volumes in 2020/2021, recovering

briskly to 2% growth in 2022. Beyond that, sea trade grows at 3.2% per annum, the historic

average, reaching 28.8 billion tonnes in 2050.

SEA TRADE SCENARIO 2 (SOFT GROWTH):

In this scenario containment is effective in Europe & USA but the virus proves hard to shake off,

with infections re-occurring over the late summer. Businesses operate later in the year, thanks

to the fiscal support, now well over budget, but not business as usual. This expensive and patchy

recovery drags through winter, and it is 2023 before the major G7 economies are back onto an

even keel, with adequate hospital facilities to treat the critical cases, supported by testing, and

transparent “immunity identification” and inoculation. The decline in global economies carries

on throughout the year, with weak commodity demand. In 2024 sea trade finally picks up and

Figure 2: Three sea trade scenarios of corona virus & climate change developments 2020-2050

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Sea Trade Scenario 1 (trend growth): after the mild CV recession in 2020 & 2021, sea trade grows at 3.2% per annum, the historic average, with occasional interruptions, processions and booms. Trade reaches 28.8 billion tonnes in 2050.Sea Trade Scenario 2 (soft growth): after extended CV recession (-1% pa 2020-2024) trade slows to 2.2% per annum growth assuming "business as usual", but at a lower rate to reflect the trade development cycle. Trade reaches 20 billion tonnes in 2050. Sea Trade Scenario 3 (slump growth): during the severe CV recressionsea trade falls 17% by 2024. In the longer term climate problems cut fossil fuel trade growth to -1.5% pa with slower major bulk growth (-.4%) & faster intra-regional container cargo. Total trade grows at 0.7% per annum to 11.6 billion tonnes in 2050.

1.Trend28 Bt

2. Soft20 Bt

3. Slump12 Bt

Three climate change scenarios(Trend; Soft; Slump)

Three corona virus (CV)

scenarios (mild, extended,

severe)

Source: Martin Stopford, April 2020


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from 2025 onwards grows at 2.2% per annum. This long-term scenario reflects the higher cost

of low carbon transport; reduced transport of fossil fuels; and some reduction in the heavy

industrial end of the business. Sea trade reaches 20 billion tonnes in 2050.

SEA TRADE SCENARIO 3 (SLUMP GROWTH):

Finally, in scenario 3 the lockdown restrictions do not work fast enough in Europe and USA and

high or recurrent infection levels continue. By late summer the lockdown becomes very

problematic as governments face funding problems, as the continued partial shutdown eats

deeply into the real economy. Virus related problems drag on, compounded by problems in the

real economy as businesses struggle to get re-established. Tourism and business travel recover

slowly, as do public gatherings of all sorts. Global oil trade falls steadily. By 2024 sea trade has

fallen 15%.

The macro economics of this downturn were not analysed, but the driving force is that repetitive

or ongoing partial lockdown funded by fiscal programs rises way above the original 15% to 30%

of GDP prove difficult to manage and have limited success in stimulating the demand upturn

needed to kick-start recovery. Lack of inoculation and reliable testing lead to behavioral

problems.

For shipping, this recession is like the 1980s but not as bad as the 1930s. How it would develop

deserves more attention than I was able to give it in the time available. Zero interest rates might

give it a different dynamic. In the long term (i.e. to 2050), changing transport and travel

behavior, combined with climate pressures, cut fossil fuel trade growth to -1.5% pa and major

bulk growth by -0.4%. Faster growth of intra-regional container cargo, as supply chains shorten

is another possible change. Total trade grows at 0.7% per annum from the trough to reach 11.9

billion tonnes in 2050.

The impact of these three scenarios is highlighted in Figure 2. In terms of shipping markets,

Scenario 1 might have an impact like the credit crisis in 2009, whilst Scenario 3 resembles the

depression triggered by the second oil crisis in the early 1980s. The impact of these scenarios for

ship owners would depend on both fiscal measures and interest rates which would reduce the

financial stress for leveraged companies.

6. Three Shipbuilding Demand Scenarios

The three shipbuilding scenarios shown in Figure 3 were developed from the trade scenarios in

Figure 2, by applying various assumptions about the performance of the fleet under different

circumstances. Note that the historic data 1964-2019, shown by the blue bars, represents

shipbuilding deliveries, but the forecasts are based on the “requirement” for new ships derived

from expansion demand (due to the growth of trade) and replacement demand (due to the

demolition driven by the ageing of the fleet, or possibly obsolescence). This “requirement” is

not an indicator of deliveries, which are determined by orders, which in turn depend on investor

sentiment and sometimes government policy. “Requirement” is, strictly speaking, just the extra

tonnage needed to service trade. How and when that capacity arrives is a different matter.

The main variable driving it is the speed at which the fleet operates (note the emissions

scenarios discussed in Section 8 do not take account of auxiliary engine consumption and the


12

“newbuilding requirement” is a calculation and is not the same as “orders placed” which

depends on investor behaviour). Three speed scenarios were used, and average ship size was

assumed to increase by 40% between 2020 and 2050: –

SHIPBUILDING SCENARIO 1 (TRADE SCENARIO 1, DESIGN SPEED, FLEET REPLACEMENT):

This scenario is the most manageable one for the shipbuilding industry, and after a relatively

mild downturn caused by the CVP, the requirement for new ships incorporating the latest

technology grows very rapidly. It assumes that throughout the period the merchant fleet

operates at its design speed, which is assumed to be 14 knots (note that over the last decade the

fleet has been operating about 2 knots below the design speed).

This scenario shows a short sharp contraction in new building requirement during 2021,

following which the newbuilding requirement grows towards a 250 million deadweight peak in

the early 2030s. This peak is due to 3.2% pa trade growth and replacement of the ships built in

the 2009-2013 boom. Since this scenario involves trend trade growth and the fleet operating at

its design speed, it would rely heavily on zero-carbon propulsion to avoid breeching the IMO

2050 carbon target. The shape of the peak requirement would also be modified if there was

heavy obsolescence or recession driven demolition during the 2020s.8

SHIPBUILDING SCENARIO 2 (TRADE SCENARIO 2, SLOW SPEED, FLEET REPLACEMENT):

In shipbuilding scenario 2 the fleet slow steams at 12 knots based loosely on recent market

practice. This produces a 14% reduction in fleet transport capacity compared with Scenario 1,

and a 38% reduction in fuel consumption (and emissions) produced by diesel engines. In the

short term it is based on the more extended coronavirus downturn built into Trade Scenario 2,

and once that is over, trade grows at 2.2% per annum and the fleet operates at 12 knots. This

scenario suggests a severe downturn in shipbuilding demand over the next two years, shown by

8 Age -based forecasts of this sort can be misleading because of the difficulty of knowing exactly when surplus capacity will be scrapped. For example similar analyses of the demolition of VLCC's built in the 1970s boom proved misleading because some were scrapped in the 1980s during the depression; others were scrapped in the 1990s during a difficult market; but the remainder went on to trade up to 30 years.

Figure 3: three shipbuilding scenarios showing actual deliveries to 2019 and “required” deliveries scenarios 2020-2050

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1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 2020 2026 2032 2038 2044 2050

Actual Deliveries

Scenario 1: design speed (14 knots)

Scenario 2: slow speed (12 knots)

Scenario 3 eco speed (10 knots)

Ship

yard

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t

These show the three corona virus scenarios discussed in Figure 1.

Counter-cyclical ordering will probably fill the gap

Source: Martrin Stopford 2020

“Required” deliveries are based on the Expansion Demand (change in the fleet during the year) plus the Replacement Demand (tonnage scrapped based on tonnage reaching 25 years old). This is NOT a prediction of actual ordering which will be determined by speculative and policy decisions as well as shipyard pricing policies.


13

the red line in Figure 3. But after that the shipbuilding requirement picks up, peaking at 200

million tonnes in the early 2030s. This demand is mainly due to the need to replace ships built

during the shipbuilding super boom 2010 to 2015 and the slower operating speed. Early

scrapping during the coronavirus recession, or due to technical obsolescence in the 2020s,

would change the shape of this curve. Counter-cyclical ordering will play an important part in

determining how the early years of this scenario develops for shipyards and owners.

SCENARIO 3 (TRADE SCENARIO 3, ECO-SPEED, FLEET REPLACEMENT):

Shipbuilding scenario 3 the fleet slows to an eco-speed of 10 knots, reducing the transport

capacity of the fleet by 17%, other things being equal, and achieving an additional 40% reduction

in fuel consumption and emissions compared with Scenario 2. In the earlier years operating at

the lower eco-speed could reduce the transport capacity of the fleet below the level of transport

demand. But the coronavirus recession alleviates that pressure.

Scenario 3 produces a more severe recession in the early 2020s, due to the deep CVP driven

downturn in the world economy. Shipbuilding demand does not recover until 2025, reaching a

peak of 160 million deadweight, roughly the same as in 2011. As in the other scenarios this peak

is due to replacement of the ships delivered in the 2009-2012 boom and the increased

deadweight capacity of ships needed by the fleet operating at only 10 knots. In Scenario 3, if past

recessions are any guide, counter-cyclical ordering by investors or governments is likely to play

an important part in determining how the early years of this scenario develops for the shipyards

and owners. Technology driven orders might motivate this sort of activity.

Overall the three shipbuilding scenarios highlight risks facing the shipbuilding industry during

the coronavirus pandemic, and demonstrate the levels of shipbuilding capacity needed in the

following decade for fleet replacement; to compensate for slower operating speeds; and to build

the low emission ships needed to meet climate change objectives. Counter-cyclical investment

will clearly be a major issue. Since these involve unpredictable behavioral variables, they cannot

be modelled precisely. But they raise issues which should be considered when developing

strategy.

7. Three Waves of Technical Development

Figure 4 illustrates how the technical challenges facing

the shipbuilding industry in the coming decades could

be met, starting from Trade Scenario 2 (the "soft" trade

scenario) and Shipbuilding Scenario 2 (the slow speed

scenario). Under this scenario the “requirement” for

new ships falls over the next two years and then climbs

to a peak of about 200 million deadweight in 2035. In

practice ordering will probably not follow the

“requirement” estimate closely because of counter-

cyclical ordering by investors taking a long-term view.

Table 1 World merchant fleet May 2019 by main propulsion type

Engine Type Number Mill Dwt Av dwt % Number

Diesel 2-Stroke 25,109 1,783 71,009 78%

Diesel 4-Stroke 5,385 55 10,289 17%

Diesel Electric 1,198 33 27,812 4%

Steam Turbine 306 26 84,005 1%

Non Propelled 170 23 132,374 1%

Hybrid Mech./Elec. 105 8 72,962 0%

Combined 13 1 99,505 0%

Gas Turbine 14 0 14,217 0%

Batteries & Diesel 18 0 3,932 0%

Nuclear 7 0 7,547 0%

Steam Reciprocating 2 0 2,686 0%

Grand Total 32,341 1,929 59,656 100%

From file in market data fleet (owner)

Source: world fleet over 5000GT


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The key investment issue is the propulsion system of the ships built in the coming decade.

Today over 99% of the world cargo fleet over 5000 gross tonnes (GT) relies on fossil fuels for

propulsion (see Table 1). Of this 78% is two stroke diesel engines; 17% is four stroke diesel; 4%

diesel electric and 1% steam turbine. The only non-fossil fuel driven ships in this size range are

seven nuclear icebreakers. The IMO regulation requires emissions to be less than half the 2008

level by 2050. Although emissions are not precisely quantified, this would mean a reduction

from around 900 million tonnes of carbon (the approximate 2008 level) to around 450 million

tonnes of carbon in 2050.

By 2050 Scenario 2 requires 2.7 billion deadweight of

new ships. The problem for investors is that no zero-

carbon propulsion system is available for commercial

cargo ships. In future the most likely solution would

be fuel cells generating electric energy from hydrogen

or ammonia. But electric power plants of this sort are

not expected to be commercially available until the

late 2020s. In addition, supplying and delivering

“green” hydrogen or ammonia bunkers (i.e. produced

without carbon emissions) will be difficult and

expensive since clean, green fuel of this sort will be

much in demand on land. So meeting the carbon challenge must involve a phased approach, in

which design innovation is introduced in three Technology Waves 2020-2050 shown in Figure

4.

TECHNOLOGY WAVE 1:

This wave starts with the chasm in new building requirements between 2020 and 2024, and the

possibility of covering this with counter-cyclical ordering deserves careful attention9. The first

9 This is not a prediction of what will be ordered. On several occasions in the past when shipbuilding requirement has slumped in this way, investment has continued, driven either by liquidity; counter cyclical ordering, or the

Gas and hybrid propulsion vessels would be

an important testing ground for developing

designs that, despite their technical

sophistication, are cheap, reliable and

commercially robust enough to be successful

in the bulk and liner trades.

0

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Wave 1:Diesel Ships(enhanced/

IMO compliant)

Wave 2:Gas/hybrid

electric (ready for

step 3)

Wave 3Fuel cell, Electric, nuclear?

Note – more ships will be needed as

the speed of the fleet is

reduced

Please note that this is a scenario to illustrate the way things might develop, not a forecast, it will almost certainly be wrong!

Figure 4: Technology scenario 2 to reach IMO 2050 CO2 target (based on trade scenario2 and shipbuilding scenario 2)

Ship requirement “hole” caused by CV Scenario 2 - probably

filled with speculative or policy

driven counter cyclical ordering

Source: Martin Stopford 2020

ReplacementDemand 25

years on


15

wave must inevitably involve the production of diesel ships. Diesel engines are highly efficient

and with no viable zero carbon alternative, the most effective option is to continue investing in

diesel engines, whilst using digital I4 technology to improve the performance of the whole

shipboard platform.

This will involve a substantial re-engineering of on-board functional systems10, including the

introduction of digitally integrated operating systems for the eight major functional areas on

the ship, linked by controller area network technology, like the CANbus F2 systems currently

used on many other transport vehicles.

Another challenge will be to convince investors that they will be allowed to trade diesel-

powered ships long enough to depreciate them. If these problems can be resolved, this period

of development would not be lost time, it would create the technical framework for moving on

to Wave 2 which involves gas and hybrid vessel propulsion systems and ultimately Wave 3 which

probably involves all-electric ships using fuel cells and batteries in some form.

TECHNOLOGY WAVE 2:

This technology wave involves gas and hybrid powered vessels, which starts in the early 2020s

and continues until the end of the period. Pricing will play an important part in determining

the way in which this wave develops. Gas and hybrid vessels using batteries represent an

important testing ground for developing designs that, despite their technical sophistication, are

cheap, reliable and commercially robust enough to be successful in the bulk and liner trades.

Initially they are likely to be more expensive than conventional vessels, and the lower carbon

emissions savings of about 20 to 30% would need to attract sufficiently high timecharter rates

to compensate.

TECHNOLOGY WAVE 3:

The third wave comprises the zero carbon propulsion systems which are currently only just off

the drawing board, and face scalability problems. First generation commercial fuel cell and

battery propulsion might be available in the mid-2020s. Developing a bunker network would

also take time due to technical and safety problems in distributing these dangerous

commodities. Finally, the propulsion systems and bunkers are likely to be much more expensive

than hydrocarbons. So, investors will face difficult decisions, whatever they do. Indeed, difficult

choices might prove to be the theme of the 2020s for investors.

On a positive note, the technology wave scenario in Figure 4 would reduce carbon emissions to

328 million tonnes by 2050, well below the IMO target of around 450 million tonnes. By 2050

the whole diesel fleet would be phased out, but under Scenario 2 this would have been done in

an orderly way which allowed investors to depreciate their ships over their normal operating

life, since there are no new diesel ship deliveries after 2030. There would, however, still be a fleet

of gas and hybrid vessels in operation. The cost new ships, both in terms of acquisition cost and

operating cost, has not been examined in detail. That is for another day!

desire to get the latest technology, during an era of technical change. Once this trough is over, the chart shows three waves of investment. 10 The functional systems include engine, auxiliary power, auxiliary machinery, ballast & trim, navigation, cargo handling, IT & communications, and maintenance.


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8. Carbon footprint of the three scenarios

Finally, the three scenarios produce very different results in terms of the carbon footprint of the

merchant fleet as can be seen in figure 4. Scenario 1, which assumes 3.2% trade growth and 14

knots operating speed produces carbon emissions of 771 million tonnes in 2050, well above the

IMO target of around 450 million tonnes of carbon emissions. But the other two scenarios do

much better. Scenario 2 reduces carbon emissions to 324 million tonnes in the 2050 and

Scenario 3 produces carbon emissions of 184 million tonnes. All these scenarios depend upon

the three waves of technical development described in Figure 4. Of course, these improvements

are only partly achieved by new technology. Slower operating speeds and lower trade growth

play a major part.

Martin Stopford

[email protected]

20 April 2020 -

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Scenario 3 Scenario 1 Scenario 2

Figure 5 : Carbon emissions for scenarios 1-3 based on trade, shipbuilding & technical scenarios

Scenario 1 assumes fleet operates at

design speed 2009-2020

Scenario 3: 184 Mt Carbon10 knots, 0.7 % trade growth, 3 wave tech

Scenario 1: 771 Mt Carbon 14 knots, 3.2% trade growth, 3 wave tech.

Scenario 2: 324 Mt Carbon 12 knots, 2.2% trade growth, 3 wave tech

Source: Martin Stopford 2020

mailto:[email protected]


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Appendix 1 Summary of paper presented in Shanghai 3 Dec 2019

Paper presented by Dr Martin Stopford, non-executive president, Clarkson Research at Marintec 40th

Anniversary Senior Forum, Shanghai, 2nd December 2019

Dr Stopford’s paper will focus on the way seaborne trade will develop in future, given the challenges presented to the industry by the "climate emergency" and digital technology. Substantial investment will be needed to build ships capable of achieving lower, and eventually, zero emissions. In addition, during the coming decades, the shipping and shipbuilding industries must invest heavily in digital systems to improve transport efficiency, safety, reliability and the provision of low-cost Business to Business (B2B) transport.

The presentation will discuss strategies for cutting carbon emissions by 2050. It will also review the application of digital systems to ships. If shipbuilders follow the example of the car industry, as Dr Stopford believes they should, they will need to apply Control Area Network (CAN) protocols to the management and automation of on-board systems. All this will call for major investment by shipbuilders and shipping companies. In shipbuilding this will require “super-companies” large enough to research, develop and apply this radically new technology to ship production, in co-ordination with their customers, the suppliers of marine equipment. The regulatory framework will also play a major part in ensuring the success of this innovative investment.


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Appendix 2 Summary smart shipping technology slides 2020-2050


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IntroductionExecutive Summary1. The starting point for the scenarios2. Analysis of the Severity of Shipping Cycles 1885-2020Ship prices as a measure of market cyclesLength and depth of market troughs 1885-2020Severity of market troughsConclusions from the trough severity analysisa closer look at freight market troughs 1970-2020

3. Influences on the forthcoming recession4. Pandemic Scenarios and the technical revolution5. Three Seaborne Trade ScenariosSea Trade Scenario 1 (trend growth):Sea Trade Scenario 2 (soft growth):Sea Trade Scenario 3 (slump growth):

6. Three Shipbuilding Demand ScenariosShipbuilding Scenario 1 (trade scenario 1, Design speed, fleet replacement):Shipbuilding Scenario 2 (Trade Scenario 2, slow speed, fleet replacement):Scenario 3 (Trade Scenario 3, Eco-speed, fleet replacement):

7. Three Waves of Technical DevelopmentTechnology Wave 1:Technology Wave 2:Technology Wave 3:

8. Carbon footprint of the three scenariosAppendix 1 Summary of paper presented in Shanghai 3 Dec 2019Appendix 2 Summary smart shipping technology slides 2020-2050

Dr Martin Stopford | President Clarkson Research · 2020. 5. 14. · THREE MARITIME SCENARIOS...

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